SharonAI Holdings Inc. 10-Q

Item 1A. Risk Factors. This quarterly report should be read in conjunction with the risk factors included in our 2025 Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the SEC on March 31, 2026, and those disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2026. These risk factors do not identify all risks that we face — our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Except as set forth below, there have been no material changes from the risk factors previously disclosed in those filings. We are substantially dependent on NEXTDC as our primary data center provider, and any delay, disruption or failure by NEXTDC could materially impair our ability to deliver services and generate revenue. We have secured up to 87MW of capacity through NEXTDC and rely on NEXTDC to host substantially all of our GPU infrastructure. If NEXTDC experiences construction delays, financial difficulties, power supply issues, or fails to deliver contracted capacity on schedule, we may be unable to deploy our GPU fleet, fulfill customer contracts, or generate anticipated revenue. Our revenue projections and growth strategy are materially dependent on NEXTDC delivering capacity on time and as contracted. Any failure or delay by NEXTDC could cause us to miss revenue guidance, breach customer agreements, and suffer reputational harm, any of which could have a material adverse effect on our business, financial condition, and results of operations. The Declining GPU Per-Hour Rate Structure in our Agreement with a Significant Customer Will Result in Materially Lower Revenues Over the Term of the Agreement, and Our Ability to Generate Sufficient Revenue From Third Party Sales to Offset This Decline Is Uncertain. The customer price for GPU services in our agreement with a significant customer declines predictably over the six-year contract term — The business model contemplates that we will sell all or part of this compute to Third Parties, generating a revenue share with such customer on the spread. However, the Third Party market for GPU compute is highly competitive and subject to rapid price changes driven by evolving AI hardware generations, competing hyperscaler offerings, and fluctuating AI workload demand. There is no assurance that we can sustain Third Party revenues, and failure to do so will result in a material decline in revenues and profitability during the contract term. We Face Significant Execution and Delivery Risk in Deploying a Large-Scale, Multi-Phase GPU Clusters on a Compressed Timeline, and Failure to Meet Agreed Delivery Milestones May Result in Automatic Reductions to the Applicable Service Period and May Give our Customer the Right to Terminate. We have committed to delivering a specified numbers of GPUs as of specific dates pursuant to our various customer contracts. For each day of delay beyond the handover date, the total service period may be reduced, directly reducing lifetime revenue for that customer contract. If cluster acceptance testing cannot be completed by specified deadlines, the customer may have the right to terminate the contract. Clusters of this scale involve complex hardware procurement and multi-phase acceptance testing. Supply chain disruptions, construction delays, hardware shortages, or technical failures during testing are all realistic risks. Investors should understand that execution risk is extremely high in the critical 2026–2027 period, and that any delay directly reduces the aggregate revenue that can be generated over the life of the various customer contracts. - 38 - Our Revenue Model with Regards to our Agreement with A Significant Customer Is Dependent on Uncertain Third Party Customer Demand, and the Revenue-Sharing Mechanics May Result in Revenues Materially Lower Than Expected. Our customer contract with a significant customer contemplates that such customer will have little to no access to or use of the services unless they are not fully utilized Third Parties. Our ability to earn revenue above the price such customer has agreed to pay — which is the basis for a Shareable Revenue split — is entirely dependent on our ability to attract Third Party customers at pricing above the price such customer has agreed to pay. Revenue share is only earned on the spread between what a Third Party pays and what such customer would have paid, and all revenue is reduced by any service credits provided to customers. At the same time, the varying contract price over the contract term means that the contract price that the Company is entitled to also varies.. We must simultaneously manage Third Party relationships, negotiate pricing, maintain SLAs for those customers, and comply with all notice obligations to NVIDIA in respect of sold services. The net revenue profile of the business is therefore highly sensitive to Third Party market conditions that we do not control, and investors should not rely on the revenue share as a predictable or stable revenue stream. Our Australian operations are subject to export control laws that may restrict certain activities Our Australian subsidiary, SAI AU Holding Co Pty Ltd, is subject to Australian export control laws. While Defence Export Controls (DEC) has advised that our Token-as-a-Service technology does not currently require an export permit under the Defence and Strategic Goods List, this assessment expires after 12 months. The Defence and Strategic Goods List is updated regularly, and any changes could result in our technology becoming subject to additional export control requirements. We are also independently responsible for obtaining authorizations from the Australian Department of Foreign Affairs and Trade before exporting, supplying, or brokering our technology to any sanctioned destination or entity. Failure to comply with applicable export control laws could result in penalties, reputational harm, and disruption to our business. Changes to United States trade, tariff, import/export regulations or AI-related laws which may require SharonAI to restrict or terminate customer relationships The United States has recently enacted and proposed to enact significant new tariffs. Additionally, President Trump has directed various federal agencies to further evaluate key aspects of U.S. trade policy and there has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, sanctions, export controls, treaties, tariffs, national security and the use and deployment of artificial intelligence technologies. There continues to exist significant uncertainty about the future relationship between the U.S. and other countries with respect to such trade policies, sanctions, export controls, treaties, tariffs, national security and the use and deployment of artificial intelligence technologies. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the U.S. Any of these factors could depress economic activity and restrict the Company’s access to suppliers or customers and have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, the United States has proposed and implemented laws and policy measures that restrict the provision of AI related technology, services or infrastructure to entities connected with certain countries and jurisdictions. If new or expanded US or any other foreign government laws, regulations or government directives are introduced, or existing measures are amended or interpreted more restrictively, the Company may be required to limit, suspend or terminate its ability to provide services to certain customers, including customers that are otherwise compliant under Australian law. This may occur with limited notice and irrespective of existing contractual arrangements. The termination or restriction of customer relationships could result in lost revenue, contract disputes, increased compliance costs, reputational damage and operational disruption. In some circumstances, the Company may also be exposed to penalties, fines, sanctions or enforcement action if it fails to comply with applicable laws and regulations, including export controls and trade restrictions. The Company may also face increased costs associated with monitoring and adapting to rapidly evolving regulatory requirements. Any such outcomes could materially and adversely affect the Company’s financial performance, growth prospects and business operations. There can be no assurance that the Company will be able to identify and comply with all applicable laws and regulations in a timely manner, or that compliance will not require significant expenditure of management time and financial resources. - 39 -